Monday, March 18, 2013

For a long time, gold standard advocates in the United States have had differing viewpoints about whether a new gold standard system might take place with existing institutions, such as the Federal Reserve, or whether it would take place with new institutions, and the Federal Reserve would in effect be disbanded or rendered irrelevant.

During the 1980s or 1990s, it seemed politically impossible to even consider a situation in which the existing monetary plumbing would be torn out and replaced with some “free banking system” or other such solution. The Fed, under Greenspan and Volcker, seemed to have a pretty good handle on things. The economy was doing well and people were enjoying a Great Bull Market in both stocks and bonds. This was not the time when you throw everything overboard for some goofy new idea.

Instead, the notion then was that the Fed was, in effect, mimicking a gold standard anyway. The end effect of Volcker and Greenspan’s management was that the value of the dollar was stable vs. gold around $350/oz. during those decades. The argument was that this goal could be achieved in a far better way by simply linking the dollar’s value to gold directly, as was the case with the $35/oz. Bretton Woods parity of the 1950s and 1960s.

As Alan Greenspan said during his last talk before the House Financial Affairs Committee in July 2005:

“And, indeed, since the late ’70s, central bankers generally have behaved as though we were on the gold standard.”

Ridiculous? In July 2005, the value of the dollar vs. gold averaged $424/oz. In August 1987, when Greenspan arrived at the Fed, it averaged $450/oz. Point-to-point, over the eighteen years of Greenspan’s tenure, the result was just as if the U.S. was on a gold standard system. The problem was all the volatility and uncertainty in between. We just wanted Greenspan and the Fed to “behave as though we were on a gold standard” a little more rigorously.

Also, the gold standard advocates of the 1980s and 1990s were a pretty kooky bunch, pounding the table for all kinds of “100% pure gold standard system” notions that were honestly rather laughable, and unusable in practice. What they called a “gold standard” did not resemble any actual gold standard system in use in the previous two centuries. Among a more sober and sophisticated crowd, these people got the attention they deserved, namely: zero.

Today, however, the situation is different. The Federal Reserve seems to be ambling along a well-trod path to rampant currency debauchment. Historically, the currency manager in these situations is indeed replaced, whether the Reichsbank of 1920s Germany (replaced by the Rentenbank) or the U.S. Federal government-issued Continental Dollar, replaced by a free banking system and, in fact, a new Federal government.

Also, gold standard advocates these days seem to have outgrown some of their more imaginative (read: stupid) notions of past decades. I think more progress needs to be made here, but most proposals I see today are actually quite sensible at their core.

Let’s see what Alan Greenspan has been saying recently:

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.”

In the same January 2011 interview, Greenspan apparently wondered out loud if we even require a central bank!

When Alan Greenspan starts to talk about “End the Fed,” things are changing.